Globalising the mainstream

Sir Tim Berners-Lee’s article on the online version of the Scientific American might just have been shared by less than 7,000 people on Facebook, but that’s possibly the whole point of the article: it makes a plea to keep the Web neutral. A tough call which only appeals to what Prokofy Neva calls “technocommunists”, privacy-conscious netizens, and a few oldtimers who might have debated Tim’s views on the first USENET forums about the emerging Web protocol, in the early 1990s — discussions around the <BLINK> tag and why it wasn’t such a good idea 🙂

The rest of the world is pretty much joining Facebook like crazy, sharing all their personal data, and the trend doesn’t seem to be stopping so soon — even though Facebook grows way faster than the Internet, there is an upper limit of users: the world’s population. Still, it’s fair to say that pretty much everybody who is on the Internet regularly has a Facebook account (or several), even though they might not use it much. And certainly aren’t spending any money on Facebook.

On the other side of the coin we have niche markets. In an interesting article about the role of the mainstream appeal, Robin Harper, formerly VP of Marketing for Linden Lab, explains how the change from a niche market to the mainstream might force companies to develop different strategies. In her new role at Playdom she will most certainly have to deal with a mainstream product — new Playdom games on Facebook attract millions of players just days after being launched. Second Life, by contrast, just gets 300,000 new registrations per month, most of them never returning again. The business models behind both approaches have to be completely different.

There is no “best” choice (e.g. the mainstream is not inherently “better” or even “more valuable” than a niche market), just different strategies to pursue the same goal: profitability. BMW makes far less cars than Ford or Toyota, but that doesn’t mean that BMW is losing money, or that they don’t have an interesting market. Ralph Lauren, Hermès, Dior, Chanel all sell to niche markets, and they’re not bankrupt; they don’t need to follow American Apparel’s or Zara’s lead. Microsoft Windows has 90% of the operating system market, and Nokia still dominates the mobile phone market, but the most valuable company in the world is Apple (well, almost), not Microsoft, nor Nokia. So clearly there is a case to be made pro and against “being mainstream”; it’s definitely not an easy recipe for success, just one of the possible strategies.

How to become global: get journalists!

Facebook is pretty much a brainchild of the dot-com era: get people to match profiles, invite their friends, let the network grow, sell ads on it. So long as the media are happy with the numbers, they will write articles about it. Articles with numbers — in this case, registered users — attract attention. This brings even more users to Facebook, but, more important, it makes economists go ho-hum and venture capitalists, business angels, and investing companies drool. Having completely forgotten why the dot-com bubble burst, they’re eager to jump on anything that attracts the attention of the media, and journalists, being hardly trained economists, just know about one thing: numbers. Since the early 1990s that’s all they care about: how many people use a service.

I cannot blame them entirely. Understanding business models is hard. In the entertainment business — as well as on most businesses — “lots of users” usually means “lots of money”. Just because the Internet is actually very different (most of the Internet use costs little besides bandwidth) is hard to understand. In the so-called real world, we don’t have many examples where “lots of non-paying users” are a relevant metric. A shopping mall announcing hundreds of millions of visitors, but nobody actually buying anything, would be very strange. In some cases, a few examples exist: for instance, on a rally against Government, having millions of people protesting on the streets make a difference. A charity event which is free to attend can feel the importance of showing a huge attendance, even if most people didn’t contribute to the funds; but at least they were present. And on marketing events, attendance can certainly be high but few might actually become buyers; that’s fine, because you can still measure “brand awareness”. Finally, in the advertising business, you’ll be pushing ads to TV or billboards and have over 99.99% of all people seeing the ads pretty much ignoring them; nevertheless, brand awareness is important to measure, and the few that actually will buy the product will compensate for the costs of actually buying the ad space.

This is the closest that we have on the “mainstream” use of the Internet. Spam works because after sending out hundreds of millions of messages for as cheap as US$50 (say, buying the massive-spamming services from Facebook’s part-owners, Russian-based Mail.ru), you might actually get a few people buying your product. Hundreds of millions have to suffer from spamming just for that handful of people willing to spend more than US$50 enlarging some anatomical part of their bodies to have a more, uh, “fulfilling sex life”. Web ads fare much better, and are as cheap as spam, but they rely on the same principle: get millions to watch, and a handful to buy, and it’ll work out.

Mainstream services on the Web still leverage on ads — and profiling, which is far more interesting in terms of financial returns — to provide some income. To “go mainstream” means mostly to deal with ratios of millions of non-paying users to a handful who pay something. Since the Internet has an estimated 2 billion users, there are plenty that pay something; get enough to join your service and pay a little bit, and you’re a financial success.

Sadly, it’s not so easy to create a business model that actually works. In fact, I pretty much believe it’s incredibly hard, because unlike other businesses, non-paying users really cost a lot. Just think about the massive amount of bandwidth and servers that Facebook has to keep to be able to provide ultrafast service to 500 million non-paying users. If all of them just paid one US$ per month for being allowed to log in to Facebook, Mail.ru would probably make 50 times their 2009 revenues. But if people had to pay just a single dollar for Facebook, they wouldn’t join. That’s what ruined most companies during the dot-com bubble, and is ruining a lot of small-scale companies which get millions in funding one year to disappear without a trace the next one. Facebook was just one of the lucky ones.

Contrast that to the usual “good examples”: Amazon.com and eBay. Both took a decade until they became lucrative — by making sure that most of their registered users are actually buyers. Both just take a tiny slice from the transactions on their online marketplaces, so they also need millions of users to be profitable. Amazon.com expanded their services to move away from the one-product-company (always a danger) and might be making some money out of their cloud services — or from selling Kindles. eBay cleverly bought PayPal (which has a quarter of a billion users — and PayPal gets a slice of every transaction) and Skype and diversifies by acquisitions. Obviously many Amazon.com registered users will never buy a single book; and similarly, most eBay users (and definitely most Skype users!) are not spending any money there. Nevertheless, the ratio is much smaller, and there is a direct correlation between their traffic and their revenues: more users mean more transactions — more people shopping, more merchants selling — and that means higher infrastructure costs, sure, but also a larger slice of the transactions. A contraction of the economy doesn’t mean much for the overall impression we have of Amazon.com or eBay — they haven’t published their number of users recently — would just mean they’d save on infrastructure costs and keep being profitable.

While an announcement that suddenly people are flocking out of Facebook by the millions would spell doom for Facebook — like it happened with MySpace (which had, at some point, a quarter of a million users) and its predecessors. That’s the tough problem when being in a market that doesn’t really exist except in the minds of journalists; few read about how much money those hyped-up companies actually make, but just care about how many non-paying users they have.

In 1999, the secret recipe to create a successful dot-com company was very simple: give accounts for free (a departure of earlier models, where “cheap” was the keyword, not “free”) and make sure it’s very easy to tell your friends — specially your friends on the media! — to join the service, and start announcing exponential growth curves. Don’t care about the infrastructure costs; make sure you reach “millions of users” and then put the company for sale. Someone is going to read those articles and make an offer to buy, paying off the venture capitalists or business angels. This actually worked until the services had to be shut down when the new parent company had no way to squeeze money out of their “millions of users”. We didn’t learn anything in the past decade; we’re still doing pretty much the same mistakes when looking at a so-called “successful” company.

But here is the recipe for success in the 21st century: get a service that journalists use, and use all the time. My journalist friends will hate me (even more) when I tell this little secret: journalists spend all their time in front of a computer, and whatever they’re running, will become the “Next Big Thing”. In 1995, it was email. Via email they could contact sources, fellow journalists, and friends — and get contacts that way which might give them a lead. Once they managed to consistently use those leads to write articles which their editors loved, they got encouraged to use email even more, and reach out further. Soon they would be telling fellow journalists about how powerful email can be, and how quickly they could validate sources, send pictures, and get information first — which they would turn into news, far faster than using traditional approaches. Editors loved it, and encouraged them to use email more. So they started writing about email as the fantastic new communication tool of the era; other journalists picked up the news and started using email on their own. And that meant that soon every journalist was using email, and, to justify spending the whole day sitting in front of the computer exchanging emails with friends and colleagues (and now and then some sources, too), they wrote even more articles about the power of email, which in turn got even more journalists to get an address, write more articles about it, and so forth. Mobile phones and the Web came next: the first allowed them to get bits of news even faster than email, no matter where they were; the Web allowed them something even more important: background material. Large news agencies and TV networks routinely employ experts to give background material; so, when, say, NASA launches a new shuttle, journalists would consult with the expert in astrophysics to get a clue of how the Space Shuttle works and why the launch was important. Expert consultants are very expensive, though. A more clever journalist would just launch NASA’s website, get the relevant information from them, and avoid paying a single cent to an expert — and make the editor happy. Soon, the combination of journalist + web became a source of information on all subjects at very low cost; and naturally, journalists used the pretext to browse the Web all the time, hoping to find leads that way — and writing more articles on how great the Web was.

The problem was how to get that information more quickly. When search engines were launched, journalists had finally a way to search a massive wealth of information — for free — and get down to business immediately. With the advent of the dot-com bubble, things became even more interesting: now journalists would have access to the Wikipedia for way more reliable information, get images from Photobucket or Flickr to illustrate their articles, look at videos before writing a story… all that information was literally swamping the Internet, all easy to grab, easy to search and locate, and re-use as part of an article. Overnight, all major media offices became digital — I would be very hard pressed to believe that there is a single major newspaper or TV station in the world today (yes, even in Kenya or India) which doesn’t give their journalists a computer with Internet access (and very likely has their own website, too). The traditional way of doing things is simply too slow for this fast-paced world we live in.

When social media started hitting the Internet, journalists were among the first early adopters. The problem with the Internet is that it has far too much garbage, and little information: the role of the journalist is to pick the gold nuggets out of the swamps of junk. But even Google with its awesome searching abilities is not perfect: single-word searches come up with way too much noise for the few nuggets of precious information. No, the best source for reliable news still are people. Reaching people, however, was hard. With Twitter first, and Facebook next, it became child’s play to be in touch with thousands and thousands of people, and sift through their bits of news. No wonder that the media was swamped with tales of success of all social media networks, promoted by the early adopters who immediately benefited from them: journalists in search of the next breaking news. The “mainstreaming” of social media thus had two major pillars: word-of-mouth growing exponentially as each new user sent invites to a handful of friends, and strong promotion on the media, because the more Facebook and similar tools are used, the more information journalists can get, and the more they can justify writing articles about it… and that means more willing editors interested in publishing those articles. The effect feeds on itself and grows and grows.

And, of course, while journalists wait for some interesting bit of news to pop in on their walls or timelines, they can play FarmVille (also owned by Mail.ru). It’s a win-win situation!